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New rules bring China’s internet giants to heel

(ATF) At noon on November 10, Chinese officials issued a report with a long and boring title that few people in the country are ever likely to read. But this weighty document could have serious ramifications not only for China’s biggest corporate entities, but considerable flow-on effects for all citizens.

Not long after the State Administration for Market Regulation issued the “Guidelines for Antitrust in the Field of Platform Economy (Draft for Solicitation of Comments), stock prices of domestic listed internet platforms fell. Corporate giants such as Alibaba, Tencent, JD.com, and Meituan saw hundreds of billions of yuan evaporate from their market value. And even the spectacular spending seen during ‘Double 11’ – China’s e-commerce shopping extravaganza – failed to restore the decline.

After more than 20 years of development, the giants of China’s internet e-commerce industry have suddenly been flagged into what looks like a slow lane, which has led observers and executives wondering: Are they set to face some urgent restructuring?

China’s internet giants enjoy being monopolies, but their bosses also worry about being “monopolised” – gobbled up by giant rivals.

According to the “Statistical Report on China’s Internet Development Status”, as of June 2020, the number of internet users in China has reached 940 million, and the internet penetration rate has reached 67% of the country. The number of people using digital services such as online food delivery, online education, online car-hailing, and online medical services reached 409 million, 381 million, 340 million, and 276 million, respectively, accounting for 43.5%, 40.5%, 36.2% and 29.4% of all netizens – people who use the internet. These are large numbers.

They search on Baidu, China’s version of Google, or rely on Didi – a copy of Uber, while shoppers use Ali or JD.com. Their social networks include Tencent (WeChat, QQ) and Sina’s Weibo. Takeaways are ordered from Meituan.

The internet is developing rapidly, and giant companies have built up, with many of their rivals effectively crushed. A large number of users have strong market power, so this has caused some business behaviour to have a greater impact on social-related enterprises and consumers, such as big data. Users are encouraged by various means to “choose one” in each sector, so competition issues have arisen.

Merchants use the paralysis and trust of customers to analyse the user data they collect to quietly raise sales prices. Consumers themselves are ultimately victims of seemingly humble data breaches. A large platform can use its position to force merchants to choose one of two potential platforms, so merchants lose orders, and consumers are also forced to make “market choices.” Faced with the “rules of the game” set by the platform itself, users and businesses have little room for resistance.

This sort of behaviour is no different from monopolistic behaviour in the traditional economy, but the difficulty lies in how to deal with the new way in which monopolies have been created. The direct object of management is no longer behavior, but data. Data management is a highly complex issue, and this field has pioneers who have established monopolies. How to manage this important resource – “data”, and how to deal with monopoly issues, is a new predicament for regulatory authorities.

Chang Liang, executive director of Beijing Jiashan Law Firm, told InfoQ that before the introduction of the Antitrust Guidelines, it was difficult to analyse such issues if one used traditional anti-monopoly thinking, as that made it difficult to resolve many cases involving similar issues in a timely manner.

In reality, very few people go to the merchant to make a complaint over a few dollars that they have lost or has as some say been “stolen”. They don’t want to call 12315 at most to file a complaint. Almost no one chooses this time-consuming, costly, and labour-intensive method of litigation. Chang Liang said that at present, if a violation about unreasonable behaviour can be confirmed, the most effective way deal with it is to appeal to relevant industry authorities. Problems can also be resolved through arbitration or litigation, but the most direct way is to negotiate a settlement.

A dog-eat-dog world

For a monopoly, competitors in the same industry are more sensitive. The giants enjoy the vested interests brought about by monopoly, but also worry that they will become a “monopolised” entity, if their competition grows they may be overtaken, because it’s dog eat dog rules.

In November 2010, Tencent explicitly prohibited their users from using Qihoo’s 360 software, otherwise the QQ software service would be stopped. Users who installed 360 software would be refused related software services, such as updates, and were forced to delete the 360 software. In November 2012, 360 sued Tencent, arguing that it had abused its dominant market position in instant messaging software and service related markets and constituted a monopoly. However, a court finally ruled that Tencent’s actions did not constitute an abuse of market dominance prohibited by the Anti-Monopoly Law, and rejected all of 360’s claims.

In addition to abuse of market dominance, monopolistic behaviour also includes the signing of monopoly agreements, the concentration of operators that have or are likely to have the effect of eliminating and restricting competition, including the signing of related joint agreements between platforms, mergers and acquisitions of giants and other activities.

In 2015, Ctrip acquired eLong. After learning about this, Qunar.com immediately submitted documents to the Ministry of Commerce’s Monopoly Bureau. It believed that Ctrip’s acquisition of eLong violated the Anti-Monopoly Law and related regulations, because such a merger would give Ctrip a total share of the online hotel reservation market that exceeded 50%, and that meant it would have a concentration of operators above the threshold set by the State Council. However, the Ministry of Commerce never made a judgment on whether Ctrip was a monopoly or not.

Generally speaking, if an enterprise has a dominant market position in a relevant sector but does not abuse it, but seeks welfare for consumers, it is difficult to be classed as a monopoly.

However, there are more and more cases where giants use their dominant position to conduct business wars. Ele.me, Meituan, Taobao and JD.com are constantly asking consumers and vendors to “choose one of two”, and platform big data wars are becoming more and more fierce.

In the general situation of the digital economy, analyst Fu Xiaoyan believes that now is a good time for the country to take action. “Since we want to engage in a digital economy and national digital transformation, there must be industry governance rules. The industry environment must be conducive to development and broader innovation, rather than simply letting vested interests determine the rules.

“It is not easy to achieve a balance between innovation and fairness. Because of the lack of huge interest stimulus, the motivation for innovation and venture capital has also declined. This is inevitable.”

Fu Xiaoyan said: “The huge interest and monopoly are naturally mutually attracting.”

Time to limit the giants?

Due to the difficulty of defining monopolistic behaviour, the cycle of many antitrust litigation cases is often very long. But the promulgation of the “Antitrust Guidelines” solved this thorny problem.

The Antitrust Guidelines explain the concept of a “platform economy”. This refers to an economic form in which the allocation of resources is coordinated and organized by an internet platform. All “platforms” that meet the above definitions, whether in the field of e-commerce, mobile travel, online education, search, or information services, are internet platforms subject to these Antitrust Guidelines.

At the same time, the anti-monopoly guide also specifically highlights “platforms that make users choose one of two”, “big data abuse”, plus “tying” and other behaviour, clarifying that a counter-party offering a transaction will ‘force’ users to choose their services, or other behaviour with the same effect will be deemed to be an abuse of market dominance and thus be a restricted transaction.

After release of the Antitrust Guidelines, Tencent was the first company to respond. It is cooperating with regulators to ensure compliance with document requirements, and has said it will focus more on trading platforms – instead of digital entertainment content such as games and videos, which it may not focus on anymore.

Ten days later, Zhang Yong (Daniel Zhang), the chairman and CEO of Alibaba Group, said he would actively learn and respond to the new national policies and regulations, and build a “healthier platform economy with higher requirements”.

Fu Xiaoyan said the restructuring of giant companies will generally first focus on the business side, and make business “corrections” to actions identified by regulators. But whether it will have a more profound impact on the industry depends on how much both sides attach to these issues. If both parties attach great importance to it, the adjustment cycle will be very long and “the impact will be great.” To a certain extent, it will determine the future direction of management.

In addition, Fu Xiaoyan said there were also some technical descriptions in the platform anti-monopoly law, so this is also a weather vane for the country’s algorithm management in the future.

It is clear that the essence of the Anti-Monopoly Guidelines are to supervise and regulate the development of the ‘platform economy’ in China, but it does not necessarily limit the emergence and development of ‘giants’ in the future.

‘Super apps’, like GAFA

Fu Xiaoyan pointed out that the goal of the Antitrust Guidelines is not to prevent the birth of “super apps”, but to regulate their behaviour. Creating a super app, such as Tiktok, is fine, but after reaching that stage, it is possible to do business, under a closer gaze of regulators. This is like when Apple products started, and were forced to engage in supply chain management when they got bigger.

It appears Apple did not breach anti-trust rules in the US, nor has Amazon, Facebook, Google and others. This has created an acronym, and it has become a shorthand term for some of the most powerful companies in the world – all American tech giants. GAFA stands for Google, Apple, Facebook, and Amazon. The phrase is used by newspapers, blogs, and talking heads on TV.

CITIC Securities also noted in a research report that in the long run, a higher concentration of internet platforms is the result of natural development in the consumer internet, and in line with the basic logic of industrial development. It is expected that more supervision will promote platform companies to improve business rules and product services. But that does not change a company’s long-term market position and investment value.

International focus

At present, the international attitudes towards internet giants is getting tougher.

According to incomplete statistics from the Narada Antitrust Research Group, from 2017 to August 10, 2020, GAFA encountered anti-monopoly investigations and disputes in 17 countries and regions worldwide, were involved in a total of 84 cases. Among them, Google has been targeted the most, with 27 cases, followed by Amazon and Apple with 22 cases, and finally Facebook, with 13 investigations.

However, this has not hindered the development of the four American super apps.

On July 29, the US House of Representatives held a hearing and summoned the “Big Four” to an antitrust review that lasted for six and a half hours. After a 16-month investigation, the US House of Representatives Judiciary Committee issued a 449-page report on its technology antitrust investigation in October, which focused on the four giants’ abuse of market dominance.

Google hit, Facebook may be next

Google has borne the brunt of this anti-monopoly wave. On October 20, the US Department of Justice filed an antitrust lawsuit against Google. And this is the most serious anti-monopoly lawsuit filed by Justice officials against tech giants in the 21st century. On November 12, a group representing 165 companies and industry groups issued a joint letter calling on EU antitrust enforcement agents to take a tougher stance against Google because the search engine giant unfairly favours its own services in its web searches.

Subsequently, India also launched an antitrust investigation against Google, claiming that it abused the app store to promote payment services.

Facebook may also face its biggest ever regulatory challenge in 17 years. It is reported that US federal and state investigators are preparing to file antitrust lawsuits against Facebook, believing that its acquisition of rivals Instagram and WhatsApp has caused damage to consumers.

In the EU competition law set-up, there is no special independent code for the anti-monopoly regulation of internet platforms. It is mainly regulated by a rule system set up in the European Union Operational Treaty, while the United States’ anti-monopoly laws and regulations on internet platforms is generally based on antitrust laws.

China’s anti-monopoly bill is still in its early stages of development, but foreign monopolies on internet platforms do not seem to have good checks and balances.

As in China, the United States, and the European Union’s antitrust laws are used against internet platform companies but seem toothless.

The wave of China’s domestic antitrust cases is consistent with international trends. Chang Liang noted that its anti-monopoly guidelines shows that China will gradually set up a regulatory system for internet giants, and will provide compliance regulations for Chinese internet platforms to enter the global market in the future.

The Anti-Monopoly Guide not only clearly defines the perplexing points in internet anti-monopoly issues, it also clarifies what monopolistic behaviours are wrong and penalties for companies which do that. It also increases the compliance risk of internet platforms, and this will led to judicial judgments, which will be a key factor in whether these companies abide by the rules.

In addition, Chang Liang also said that the anti-monopoly guidelines are not only for domestic internet platforms, but may also involve foreign ‘giants’ in the future.

If an internet platform wants to better participate in international competition, it must have an international vision and strengthen technological innovation and self-management, he said.


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Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.


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